Wichita, City of
RFC completed financial planning, cost of service, and rate design studies for the City of Wichita’s (City) water and sewer utilities. The City, which faces long-term water supply constraints, was an early adopter of an aggressive conservation water rate structure and is in the process of completing an ambitious aquifer storage and recovery program that will eventually result in up to 100 MGD of recharge in the aquifer that services as its primary source of supply.
The City’s water utility serves approximately 143,000 customers and has annual rate revenues of more than $66 million. Key issues facing the water utility were ensuring adequate revenues to fund a 10-year capital improvement program in excess of $400 million and reducing the rate revenue volatility associated with an aggressive conservation-oriented water rate structure. RFC’s 10-year water utility financial plan featured the use of updated demand forecasting assumptions to project water sales revenues; detailed debt service coverage ratio projections under a variety of revenue and expense scenarios; and the development of both cash and utility basis test year revenue requirement forecasts.
RFC’s water cost of service study included the development of a revenue requirement and associated unit cost of service for each of the City’s twenty-three water rate classes including inside city retail, outside city retail, wholesale treated water customers, and a wholesale raw water customer class. To mitigate rate revenue volatility, RFC’s water rate design featured the use of a readiness-to-serve adjustment that shifted revenue recovery from the volumetric to fixed charge component of rates. In addition, the volumetric rate design shifted a higher proportion of revenue recovery to the lower consumption blocks which are associated with non-discretionary customer water consumption.
The City’s sewer utility serves approximately 140,000 customers and has annual rate revenues of more than $40 million. The primary issue facing the sewer utility was ensuring adequate funding for a 10-year capital improvement program in excess of $300 million including exceptionally large forecast expenditures to comply with expected nutrient removal regulations in the second half of the planning horizon. RFC’s 10-year sewer utility financial plan also featured the use of updated demand forecasting assumptions, detailed debt service projections, and the development of both cash and utility basis test year revenue requirement forecasts. The sewer cost of service and rate design studies featured the development of volumetric rates and fixed charges for inside city retail, outside city retail, and wholesale sewer customer classes. In addition, RFC also developed extra strength surcharge rates for both inside and outside city customers.
As part of our consulting engagement, the City requested that RFC analyze the key drivers of billed water consumption. To accomplish this objective, RFC analyzed the correlation between historical billed water consumption and driver variables such as temperature, precipitation, price, population, and regional economic activity. As part of this process, RFC developed regression equations that, for customer classes, explained as much as 70% of annual billed water demand (i.e., resulted in coefficients of determination as high as .70).
In addition to water and sewer utility financial planning, cost of service, and rate design studies, RFC also developed a pro forma financial model for the City that allows them to compare budgeted to actual water and sewer rate revenues on a monthly basis for each of its many water and sewer customer rate classes. This model, which not only includes a monthly forecast of rate revenues by customer class but also by each consumption block within a customer class, is designed to serve as an early warning system that can be used by the City to identify deviations from budgeted rate revenues as early as possible within a given rate year. Further, it allows the City to determine both the annual cash flow and debt service coverage ratio impact of deviations from budgeted rate revenues should they continue throughout the year.